Socialism and Intrafirm Asset Allocation

Abstract

We rely on a survey of Swiss firms to document deviation from first-best for reasons of internal "fairness" when allocating resources. This "socialist" practice is more widespread in smaller than in larger firms. It ignores the reputation and past performance of the managers who apply for funding, but takes into account their hierarchical position and their past use of resources. Socialism is only partially explained by concerns about empire building and managerial optimism, and it is not meant to benefit shareholders.

Keywords: Capital budgeting, Internal socialism, Empire building, Managerial optimism, Performance

JEL Classification: G31, L22, M14